LEADING THE WAY OUT OF THE EU

The Customs Union approach

19 December 2016

Liam Fox has raised big questions about the UK’s future relationship with the EU.

Secretary of State for International Trade and key Brexiteer Liam Fox has stirred discussion by floating the idea that Britain could remain in the European Union Customs Union following Brexit, adopting a trade relationship with European partners akin to that of Turkey. Appearing on the Andrew Marr programme this Sunday, Dr Fox stressed the importance of continuity in our trade relationship, saying that Britain ‘must look at all options’, highlighting Turkey as his prime example.

Staying in the customs union

It would be theoretically possible for Britain to remain in the EU Customs Union while exiting political union. The model has been adopted by three external actors: Turkey, Andorra, and San Marino. Nonetheless commentators have suggested that executing such an arrangement may be more difficult than Dr Fox anticipates. Sir Andrew Cahn, who worked to set up the single market in the 1980s, said that ‘whether that would be legal under the WTO I doubt’. Brexiteer Iain Duncan Smith has also suggested its illegality.

If possible, membership of the customs union through bilateral treaties would allow British goods to continue flowing through European markets without the imposition of duties or tariffs. It would also allow us to control our sovereign borders as the EU does against Turkey (for now). As a trade pact, it exists to facilitate open trade in goods without going so far as to attempt to simulate an internal market – while goods pass freely without customs impositions, services and workers are subject to normal transnational regulation.

The common tariff

But membership comes at a significant cost. As members of the customs union, states must impose the common external tariff on imported goods, driving up the price of foreign goods and maintaining the unnecessarily high cost of doing business. This would of course eliminate one of the major benefits from Brexit and – funnily enough – the key benefit that Dr Fox represents.

By being forced to adopt the common external tariff for those sectors in which we choose to participate in the EU Customs Union, we will be unable to strike comprehensive trade deals with global trading partners. Such a restriction exists to prevent members of the customs union from acting as an entry point for foreign goods, allowing manufacturers in other countries to circumvent protections for domestic industry in European countries by entering through a more liberal trading partner.

With so much emphasis being put in the possibilities for global trade by Dr Fox, and with the forthcoming Anglophile US administration, it seems like a strange benefit to forgo. Australia’s High Commissioner Alexander Downer had encouraging words this weekend explaining that Brexit would not be ‘as hard as some people say’, stressing the good that Australia has been able to achieve and talking down pessimistic estimates of the time spans required to strike trade pacts.

This restriction is in contrast to the other half-in-half-out approach suggested by Remainers, namely membership of the single market, within which we would be unable to control our borders but able to strike independent trade deals. Norway, for example, exists outside of the European Union Customs Union but participates in the single market. This means that goods, services, and workers flow through the border between the EU and Norway but Norway maintains the freedom to sign trade deals. The downside? To ensure that foreign goods aren’t entering the single market through Norway, Norwegian goods must surrender to complex rules of origin regulations.

Dealing by sector

Bilateral deals facilitating membership of the customs union are not totally comprehensive. For example, Turkey and Andorra do not have the ability to sell agricultural products into the European market tariff free. ‘It’s a little more complex’ said Dr Fox. ‘So Turkey, for example, is in parts of the customs union, but not in other parts’.

Sector-by-sector participation in the single market had previously been considered a possibility by Philip Hammond – who is keen to preserve the City of London’s Euro passporting rights in financial services – and Brexit Secretary David Davis, but a sectoral approach to continued membership of the customs union is a relatively new idea in cabinet thinking. Under such an arrangement, Britain could continue to remain a member of the customs union when selling certain goods while attempting to forge partial trade relationships with foreign nations in other areas.

In aviation, for example, Britain remains part of a complex European supply chain that may benefit in some respects from continued participation in the European Union Customs Union. The country is the sole producer of wings for impressive airbus vessels and ensuring that these component parts are free to move around the European continent is a definite attraction of such an option. For European partners there are certain advantages too – Germany, for example, would likely be keen to keep Britain in a customs union that permits their automobiles to be sold freely into the UK market.

Little has been laid out for sure. Dr Fox was clear that he remains ‘instinctively a free trader’ and said that he’ll ‘argue [his] case inside Cabinet’. By restricting our ability to secure comprehensive trade deals with massive global partners outside of the shrinking EU, a Turkish style arrangement will arouse the suspicions of many Brexiteers. But by securing our borders and giving the government room to cut the obscenely large immigration figures of recent years, while retaining a degree of trade continuity with the rest of the EU, the approach certainly has its appeals as well.